Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Equities are mixed in Asia despite some mostly negative leads from European trade. News that Espirito Santo Financila Group decided to delay a debt payment triggered fears of contagion and set a negative tone for global markets.
However, we have seen some stability in US futures through Asia and some of the major indices have actually come of their early lows. I suppose the question on investors’ minds is whether this latest Portugal banking crisis will lead to contagion in the region. Judging by the reaction in the single currency, then possibly the market doesn’t quite feel this is the case.
While equities were sold off, EUR/USD actually held its ground a touch above 1.3600. Perhaps the action in equities was more a fact of investors protecting profits in an environment of record low volatility and equities at a record.
The ECB has already acknowledged the dire situation and introduced some measures to help the economy. In particular, the TLTROs are something the financial space will be looking out for as banks will gain access to cheaper funds yet again. The TLTROs will be conducted in September and December and should once again ease liquidity for the region. In the near term we will need to monitor peripheral bond yields very closely particularly for Portugal along with the bunds which strengthened following the news.
Regional markets mixed
Japan has been an interesting one to watch today with a bit of a slump on the back of USD/JPY weakness. The yen seems to have picked up some ground on the back of safe haven appeal and this is hurting Japanese equities. While Japan is struggling, the ASX 200 has seen a bit of a positive turnaround. Predictably financials got off to a weaker start after a rout in European peers overnight. However the losses were fairly limited and it wasn’t long before we started seeing some buying interest. In the materials space it continues to be iron ore pure plays disappointment with FMG and AGO extending losses after production updates.
While AGO delivered a record result yesterday, the stock was still sold off and continued to struggle today. FMG posted a disappointing result, with significant misses versus market expectations on both shipped tonnes and price received. Lower grade discounting is really hitting the pure plays. FMG averaged an iron ore price of around $72/t in the quarter and this is also hurting AGO which is predominantly a lower grade producer. FMG also slashed capex guidance which didn’t bode well for sentiment in the mining services names.
Bullard says market should find a median
Looking ahead to the European session, it already seems like we are in for a bit of a recovery. The PSI 20 is pointing up around 0.3% after bouncing off levels near 6000. In the midst of all the Portuguese drama, the ECB’s Nowotny was on the wires suggesting he does not see the need for further action in the near future. This confirms recent comments by the ECB reinforcing they will wait to see the impact of recent measures before taking further action.
There isn’t much on the economic calendar today which leaves Fedspeak and potential geopolitical tension as the key themes to look out for. Speaking in the US we have Evans, Lockhart and Plosser. Perhaps they will shed more light on the yesterday’s comments. While Fischer’s comments from yesterday’s trade focused on financial sector reform, he also suggested he didn’t feel there was a big risk of asset bubbles.
Bullard balanced this out by saying he feels the US economy will overshoot inflation and also talked unemployment with a 5 handle. With such factors at play, Bullard suggested it would be a mistake for the market not to go with the median of the committee. This was a good way of balancing out some of the dovish commentary we’ve heard recently.
Gold could be in for further gains
The precious metal traded to its highest since March and broke through a key technical level. Gold rallied to a high of 1346 and knocked through the 61.8% retracement of the drop from March to June. Gold dropped from around 1392 in March to 1242 in June. The 61.8% retracement of this move came in at 1335 and not only did it trade through that level, it also managed to close above it as well. This could very well see the precious metal extend its gains in the near term. A dovish tone by the Fed, heightening Middle-east tension, and European risk certainly aided gold’s gains. Recent reports have suggested Israel has struck Palestine and Syria over the past 48 hours. This could see gold extend its gains should it amplify.
(Gold breaks resistance)
